How to Read a Balance Sheet for Non-Accountants

As a lawyer, reading balance sheets didn’t come easy. Financial statements initially felt like a foreign language. But a solid stint at business school during my MBA helped me overcome it. I’ve come to realize that understanding balance sheets isn’t just for accountants or CFOs. It’s a vital skill for Lawyers working on transactions Founders pitching to investors Investors evaluating startups Professionals who want to make smarter, data-driven decisions That’s why I put together something I wish I had earlier in my journey: 𝐀 𝐁𝐞𝐠𝐢𝐧𝐧𝐞𝐫’𝐬 𝐆𝐮𝐢𝐝𝐞 𝐭𝐨 𝐔𝐧𝐝𝐞𝐫𝐬𝐭𝐚𝐧𝐝𝐢𝐧𝐠 𝐁𝐚𝐥𝐚𝐧𝐜𝐞 𝐒𝐡𝐞𝐞𝐭𝐬 Here’s a simple way to think about a balance sheet: Always remember the formula: Assets = Liabilities + Equity Imagine you run a pizza shop: Assets are everything you use to make and sell pizza — the dough, cheese, oven, delivery bike, and cash in the register. Liabilities are what you owe — like the unpaid bill to your supplier for last week’s cheese delivery. Equity is what’s left over for you, the owner, after paying off those debts. It’s your slice of the business. So, if your shop has $1,000,000 in assets and you owe the supplier $400,000, then $600,000 is your equity — your portion of the pizza. And just like making the perfect pizza, everything must balance. If you add more ingredients (assets), you either paid for them with your own money (equity) or borrowed money (liabilities). 𝘚𝘰 𝘸𝘩𝘺 𝘬𝘦𝘦𝘱 𝘢 𝘣𝘢𝘭𝘢𝘯𝘤𝘦 𝘴𝘩𝘦𝘦𝘵? Back to your pizza shop — you need to know: How much cash you have How much you owe What portion of the business is truly yours That’s your balance sheet. Companies use balance sheets to: Show banks and investors they’re financially stable Make decisions like, “Can we afford to expand?” Track growth and spot red flags early For investors, reading a balance sheet is like checking under the hood before buying a car — it tells you how everything’s running. So if you want to read a balance sheet even without a finance degree, start with these quick checks: 𝐃𝐨 𝐚𝐬𝐬𝐞𝐭𝐬 𝐨𝐮𝐭𝐰𝐞𝐢𝐠𝐡 𝐥𝐢𝐚𝐛𝐢𝐥𝐢𝐭𝐢𝐞𝐬? That’s a good sign. 𝐀𝐫𝐞 𝐭𝐡𝐞𝐫𝐞 𝐥𝐨𝐭𝐬 𝐨𝐟 𝐝𝐞𝐛𝐭𝐬 𝐝𝐮𝐞 𝐬𝐨𝐨𝐧 𝐛𝐮𝐭 𝐯𝐞𝐫𝐲 𝐥𝐢𝐭𝐭𝐥𝐞 𝐜𝐚𝐬𝐡? That could signal a cash flow issue. 𝐈𝐬 𝐞𝐪𝐮𝐢𝐭𝐲 𝐠𝐫𝐨𝐰𝐢𝐧𝐠 𝐨𝐯𝐞𝐫 𝐭𝐢𝐦𝐞? That might suggest profitability and reinvestment. Finally, must the balance sheet always balance? Yes — always. That’s the point. Because of the fundamental accounting equation: Assets = Liabilities + Equity If the balance sheet doesn’t balance, there’s usually a mistake — a data entry error, miscalculation, or something overlooked. In the real world, that’s a red flag that needs attention. Feel free to share with someone in your network who may find this useful. Because when it comes to understanding business health, balance is everything — and now, so is your balance sheet 😁

I get a lot of finance questions from friends this time of year, mostly tax related, but recently the Balance Sheet became the focus of a conversation. So let’s break down the Balance Sheet. The balance sheet of a public company might feel like a black box—full of numbers but unclear on what they actually mean or the story they tell. Once the key pieces click into place, it becomes a powerful tool for understanding a company’s financial health and story. It can be very helpful for decision-making. At its core, the balance sheet is a snapshot in time. It doesn’t show profitability (that’s the income statement) or cash inflows and outflows (that’s the cash flow statement). Instead, it lays out three fundamental questions: 1. What does the company own? (Assets) 2. What does it owe? (Liabilities) 3. What’s left for shareholders? (Equity) Breaking It Down… Assets = What the Company Owns - Cash and cash equivalents (not always as “available” as it seems) - Accounts receivable (money customers still owe) - Inventory (products waiting to be sold) - Property, equipment, and investments Liabilities = What the Company Owes - Accounts payable (bills and short-term obligations) - Debt (loans and bonds that need to be repaid) - Other liabilities (pension commitments, lease obligations, deferred revenue) Equity = What’s Left for Shareholders - Retained earnings (profits reinvested in the business) - Stockholders’ equity (the value remaining after liabilities are covered) Why This Matters… Cash on the Balance Sheet Doesn’t Mean a Blank Check - A company may report billions in cash, but much of it could be earmarked for debt payments, acquisitions, or operational needs. Seeing a large cash balance doesn’t always mean there’s money to burn. Debt Isn’t Always a Bad Thing - Borrowing can be a smart strategy when it funds investments that generate a higher return than the cost of debt. The key is making sure leverage is sustainable. Equity Doesn’t Equal Cash in the Bank - Just because a company has significant equity doesn’t mean it has liquid cash available. Equity reflects the accumulated value over time, not what’s sitting in a checking account. For business leaders outside of finance, understanding the balance sheet provides a clearer view of a company’s financial position and long-term strategy. In my opinion, strong fundamentals don’t just keep a company stable—they create the foundation for growth. Knowing your company’s balance sheet is important for making good decisions! #finance #business #corporatefinance #treasury #tax #balancesheet

A Balance Sheet even kids can understand 👇 ~~~ 📌 3 days left 👉 https://lnkd.in/e6B7y9yk ~~~ 𝗗𝗶𝗱 𝘆𝗼𝘂 𝗸𝗻𝗼𝘄... I was never a "finance person" in school (in fact, I started as an Art Major). All the "business terminology" used to overwhelm and confuse me. The only way I could understand things was to break them down to their simplest form, and talk about it like I was at the kitchen table. That's what drove me to put this guide together (and also explain financial modeling in the same way). Hope you find this helpful! 𝗔𝘀𝘀𝗲𝘁𝘀: Cash: Dollars in my bank account. Accounts Receivable: Money people owe me (for work I've already done) Inventory: Physical stuff I'm trying to sell Prepaid Expenses: Stuff I paid for (in cash) in advance & will expense this year Fixed Assets: Assets I bought (in cash) & will expense over several years 𝗧𝗼𝘁𝗮𝗹 𝗔𝘀𝘀𝗲𝘁𝘀: Everything I Have (or will be getting soon) ~~~ 𝗟𝗶𝗮𝗯𝗶𝗹𝗶𝘁𝗶𝗲𝘀 & 𝗘𝗾𝘂𝗶𝘁𝘆: Accounts Payable: Money I owe other people Unearned Revenue: Cash I've received, but I haven't done the work yet (or delivered the service) Accrued Expenses: Expense I know is coming (this year) that I'll pay in cash later Debt: Money I borrowed to start the business or cover a cash crunch Contributed Capital: My own money to start the business or cover a cash crunch Retained Earnings: A record of what I did with the profits (not cash) 𝗧𝗼𝘁𝗮𝗹 𝗟𝗶𝗮𝗯𝗶𝗹𝗶𝘁𝗶𝗲𝘀 & 𝗘𝗾𝘂𝗶𝘁𝘆: Where Everything Came From (or needs to go) ~~~ 𝗪𝗵𝘆 𝗗𝗼𝗲𝘀 𝗶𝘁 𝗕𝗮𝗹𝗮𝗻𝗰𝗲? A balance sheet must balance because it's based on the fundamental accounting equation: Assets = Liabilities + Equity. This equation represents that all the things a company owns (Assets) are financed either by borrowing money (Liabilities) or by what the owners invest (Equity). It has to balance because every financial transaction affects both sides of the equation equally. ~~~ 👋 Hey, I'm Chris Reilly, and I teach Financial Modeling based on real Private Equity and FP&A experience. 📌 See Financial Modeling Courses 👉 https://lnkd.in/eG_uVhsE

🚨How to Read the Balance Sheet Here’s an Easy Explanation 👇 So, I was chatting with a buddy over coffee About how intimidating balance sheets can be And it got me thinking - why don't we break it down No fancy jargon, just straight talk? 1️⃣ The Stuff We Own (Assets) This is the fun part. It's like taking stock of all the cool things in your garage: - Cash: Self-explanatory. The stuff in your wallet and bank account. - Money owed to us: You know, like when your friend borrows $20 and promises to pay you back. - Inventory: All the things sitting on our shelves waiting to be sold. - The big stuff: Buildings, machines, that sort of thing. Having a lot of stuff is great, but make sure you can turn some of it into cash quickly if needed. 2️⃣ The Stuff We Owe (Liabilities) Alright, this part's a bit less fun, but super important: - Bills we need to pay: Like that invoice from the supplier you've been meaning to take care of. - Loans: The money we borrowed to get things rolling. - Taxes: Yeah, can't forget about those! Here's the thing - owing money isn't always bad. Sometimes you gotta spend money to make money, right? Just keep it under control. 3️⃣What's Left (Equity) This is the "ours" part after we've paid everyone else: - Profits we've saved up: Like your rainy day fund, but for business. - Ownership pieces: Think of it as slices of the company pie. The golden rule here? What we own equals what we owe plus what's truly ours. If that doesn't add up, we've got some explaining to do! You want to see your assets growing faster than your debts, and your slice of the pie getting bigger over time. —--------------- So, what do you think? Any part of the balance sheet that still seems like it's written in ancient Greek? Drop a comment, and let's figure this out together! —--------------- Hi! I’m Nathan Liao, Founder & CEO of: 🚀 CMA Exam Academy dot com - Pass the CMA exam on your first attempt! - 16-week Accelerator program (link in bio) - Students in 120 countries. 92% exam pass rate 🚀 CPE Flow dot com - Are you a certified accountant? - Earn your annual CPE credits (link in bio) ➕ Follow me for accounting & finance insights